How big is big? Measuring the metrics of your anti-fraud program

This is the fifth article in a series on discount and warranty fraud. Read parts one, two, three and four.

Over the past two months, this series of articles has explained why your company should be concerned about discount fraud and warranty fraud. The bottom line is that your company cannot afford to overlook these growing threats. Discount fraud schemes involve customers asking for deep discounts on your products based upon an articulated need and turning around and selling those products in the marketplace. Similarly, warranty fraud schemes are aimed at using your company’s warranty process to steal products from you.

What can you do about this fraud? Proactive companies are putting programs in place to specifically detect and prevent these frauds from occurring. But you need to get, and keep, executive support for the program. Building a case for establishing and maintaining a program to combat fraud means justifying the expenditure with measureable results.

Maintaining executive buy-in

For many companies, showing the results of their anti-fraud program is vital to maintaining the commitment and support of company executives. So how can your company measure the extent of the problem and demonstrate all the benefits that flow from having a robust program?

It is not a simple issue of showing “dollars in the door.” Sometimes the harm resulting from these crimes is more complicated and more virulent than lost dollars. In fact, if you are focusing only on dollars collected, then you are missing out on identifying many of the benefits of these anti-fraud programs.

Measurable metrics

Companies tackling these abuses head-on use a number of established methods to measure the impact of these crimes. Here are some of the benchmarks we recommend using:

Dollars in the door. Don’t get us wrong...court-ordered money sentences and judgments that actually get paid are certainly one of the best indications of the significance of these crimes and your program’s success. When the sums are large and the criminals have the money to pay them, these collections can fund the costs of your program.

Deterrence message. Perpetrators of these crimes who are caught and prosecuted are serving significant prison sentences and owe substantial amounts in restitution to their victims. When word gets out that your company is actively monitoring its discount sales and warranty return programs, and that people are serving sizable sentences for these crimes, this sends a strong message to potential fraudsters that you are not an easy target. Once your company develops a reputation for taking these crimes seriously, many perpetrators will move on to other victims.

Reduction of fraudulent activity post-government intervention. Although it can take a long time for the government to investigate a fraud scheme that you refer to them, there are mileposts along the way that are significant. If the government executes a search warrant to collect more evidence or confronts the target to seek a plea, the perpetrators of these frauds will realize that their conduct is being watched and examined. Typically, at that point, all further fraudulent activity by that target ceases. So, although an ultimate conviction may be months or years away, the search warrant or confrontation essentially ends that particular fraud enterprise.

Capturing the benefits to the partner community. The products that fraudsters procure through discount and warranty fraud schemes likely end up with brokers. The brokers use the free or heavily discounted products to compete, unfairly, against your honest channel partners. You want to know what issues your partners are being vocal about and what they are saying about your company’s efforts to stop these frauds from occurring. When the “buzz” is about how supportive your company has been, this is a measurable success of your program.

New intelligence gathered. In the course of both criminal and civil cases against the perpetrators of these crimes, as the victim, you and your attorney will often have the opportunity to sit down with the criminal to learn what they know (this occurs in the criminal process prior to sentencing, and in the civil process through a deposition). These discussions are likely to net intelligence about other fraudsters and their involvement with brokers who are selling the stolen products.

As you build a case for establishing a program to address discount and warranty fraud, we recommend looking at all the metrics involved. Outside of recouping some or all of the losses your company has suffered, there are other significant and measurable benefits that flow from having a tough anti-fraud program.

Contributing Author

Richard Nelson

Richard J. Nelson is a partner at Sideman & Bancroft LLP in San Francisco, where he specializes in litigation and government investigations. Mr. Nelson often...